How long is long enough? That effectively is the question asked in a recent Wall Street Journal article with regard to quick service restaurant hours of operations (Will Longer Hours Boost Sales?, Apr 29). Here is the issue:
With a lean economy squeezing their sales, thousands of restaurants are extending their hours to try to get more people through the door. But franchisees are learning that it can take a lot of work to get the most out of off-hours snackers.
The basic problem: Restaurants need to shoulder more expenses to keep the lights on longer—but the crowds usually aren’t that big at odd hours, and customers don’t end up spending very much. In fact, franchisees and industry experts say, some markets may not have enough all-night types to make the concept work at all.
The drop off in traffic in the wee hours of the morning is illustrated here.
We have touched on the question of how service providers should set their hours of operations previously in this blog but it’s been a while. I have long found this an interesting question if only because I know of no really good theory that provides a general illustration of the trade offs involved. One can argue that having longer hours of operations than a competitor can be advantageous since for at least part of the day the firm is a monopolist. It can then either charge more or offer lower quality and still attract customers. (We covered that argument here.)
Alternatively, one can point to examples in which restricting hours of operations can lower costs and improve profits if customers are willing to conform to the firm’s schedule. Chicago’s Saturday Audio Exchange is my favorite example along these lines (and is discussed here).
Neither of these arguments really fit the quick-service restaurant example. For one, these are not really search goods in the sense that not many customers are going to alter their dinner time to accommodate a burger chain with very short hours. Also, expanding hours is not going to cover reducing quality or increasing price. One of the main reasons to go to a large restaurant chain is that the product is consistent. Losing sales at the lunch peak because of a quality degradation is probably not going to be offset by people with the munchies at 2:00AM. A similar argument would apply to raising prices in a competitive market.
So what does the article recommend? For one, it discusses essentially the reverse of my argument for restricting hours of operations. The Saturday Audio Exchange story is more or less training customers to come in a restricted window. The article makes the case that success with extended hours requires perseverance to train customers that you are open late. That is, it takes time for people to realize that late night (or early morning) food is a possibility.
One thing that the article doesn’t mention that some firms do is to tweak the menu so that a limited selection is available at off hours. That simplifies operations and should lower cost while still offering increased convenience.